Generally, insurance is an agreement by which an insurer, sometimes referred to as an underwriter, in exchange for consideration, undertakes to indemnify the insured party against loss, damage, or liability arising from certain covered risks, subject to certain conditions and limits. The consideration paid by an insured party is typically referred to as a premium, which is paid to keep the insurance in effect. In general, an insurance policy is a contract of insurance that defines the rights and duties of the contracting parties. A typical insurance policy includes limits on the amount of risk that the insurer will cover.
For the purposes of this application, an insurance product includes more than the insurance policy. It also includes services, distribution channels, and other components which may impact the customer experience.
One type of insurance is property insurance. Property insurance protects persons or businesses from financial loss caused by perils. Perils may include, but are not limited to, losses due to fire, water, earthquake, wind, explosions, aircraft damage (as when an aircraft crashes into a structure), lightning, hail, riot or civil commotion, smoke, vandalism, falling objects, theft, volcanic eruptions, and freezing. An insurance policy providing property insurance may cover some or all of these categories of perils. By paying a premium on a regular basis, a policyholder is therefore insured against a loss caused by a peril within the scope of the policy.
A current method typically used for pricing and underwriting property insurance generally uses an aggregate of loss costs resulting from all perils. In other words, all loss costs are summed over all perils, and an average loss value is used to help determine policy premiums for all policyholders. Loss costs refer to the amount paid by an insurance company when settling a policyholder's claim. This methodology, however, does not necessarily identify a loss experience for a portion of insured persons because many policyholders have a significantly higher or lower exposure to perils than the average policyholder.
An insurer might like to even more accurately assess risk exposure and to offer its customers premiums that are even more in line with the risks associated with customers' exposure to different peril combinations. Insurance companies could achieve this objective with better information and processes to manage their risk exposure so that they can more accurately access their risk exposure and, in doing so, offer customers less likely to incur losses lower rates.